Last week the Brazilian company JBS SA agreed to acquire Pilgrim’s Pride, making it the world’s largest meat processor ahead of Tyson Foods Inc (TSN). As expected, TSN played down the potential impact the industry consolidation may have on future business. Clearly, others in the industry are preparing for further consolidation. SAFM’s strong fundamentals, some of the best we have seen in years, combined with the fact that management could possibly sell the company, make SAFM a WIN WIN in my book.
The following is a summary from Michelle Leder.
Employment agreements may seem like a pretty standard feature at most public companies. And to be sure, the overwhelming majority of companies provide their executives with employment contracts. But some companies -- for various reasons -- choose not to offer them. Or they only offer them to a few executives. So when a company that has made a point of not offering employment contracts begins to start offering them, you need to ask yourself why.
That's exactly the case with Sanderson Farms, which earlier this week entered into employment agreements with CEO Joe Sanderson Jr., Chief Operating Officer Lampkin Butts and CFO D. Michael Cockrell. None of the three executives are new to the company. Nor do they have new jobs -- the logical reasons that companies enter into employment contracts.
So that leaves us with the illogical reasons: the company is putting various protections in place for the executives in the event of a deal. All three of the new agreements have fairly standard language about what happens upon a change in control of the company, say if the executive's commute to work becomes longer than 40 miles one-way. Given Sanderson Farm's relatively remote location, it's a pretty safe bet that anyone buying the company would be beyond that distance. There's was also this phrase that caught our attention in the agreement: "the alteration of the Executive’s position in a way that significantly changes his status, offices, reporting requirements, authority, daily routine or responsibilities as they existed before the Change in Control." Under that scenario, even if the person's title remained the same, there would still be a way to trigger the change in control provisions.
The stock is down about 20% since mid-June and short-interest remains fairly high at around 9%. But back on Aug. 25, when Sanderson reported its third quarter earnings, my colleague, Howard Penney, put out a bullish note on SAFM, saying that the outlook "looks to be very bullish for the next couple of years if all of the pieces of the puzzle fall into place." Howard's main thesis was that falling feed prices and higher chicken prices combined with robust demand all made for positives, especially if demand from food service companies picked up.